Professional Documents
Culture Documents
Presented by:Amit Singh PG-10-50006 Suchitra Singh PG-10-50040 Anurag Srivastava PG-10-50011 Amit Kumar s/o APS PG-10-50007 Aniket Kumar PG-10-50009
Basic Assumptions
Individuals are risk Averse.
Individuals seek to maximize the expected utility of their portfolio over a single period planning horizon. Individuals have homogeneous expectations. Individuals can borrow and lend freely at a riskless rate of interest. The Market is Perfect. The quantity of risky securities in the market is given.
CAPM Formula
The formula for CAPM is:
r r f (rm r f )
where rf is the risk free rate rm is the expected return on the market and is the beta of the cash flows or security being valued.
The equation for this line, called the capital market line (CML), is:
where, is the slope for CML may be regarded as the price of risk in the market.
E ( Rm) Rf m
CML
E(rP)
M
Rf
P
7
SML
Rf
Systematic risk
Since,
iM iM i M
E ( Ri ) R f (
E ( Rm ) R f
) iM i
If the returns on i and M are perfectly correlated (this is true for efficient portfolios),then
E ( Ri ) R f (
E ( Rm ) R f
) i
Beta.